Nifty move below 8,650 or above 9,020 to define next trend

Global markets continued to be slightly nervous about a possible tightening from the US Federal Reserve (and also about surprising Bank of Japan action). But, the consensus assumption is that the Fed will maintain status quo, given several weak macroeconomic data points coming out of the US. In India, the Nifty found support around 8,700, but it now seems to be waiting for the Fed.

The last high came at 8,970, while the latest low was at 8,688. The support is close enough to 8,700, which is where the last upside breakout started. Assuming the Fed is dovish, bulls can certainly hope that 8,970 will be beaten, confirming a pattern of higher highs and higher lows.

Those two levels (+/- about 50 points) are important. Assuming support at 8,650-8,700 continues to hold, a bounce back to test the resistance at 8,970 may be expected. Moves beyond 8,970-9,020, (or below 8,650-8,700) should define the next trend. A breakout from these levels could swing till 8,400 or 9,250 (the latter would be a new record high).

Rupee volatility may also be a factor since dollar-rupee FCNR swaps will be reversed over the next three months. Government bond yields have stayed low, partly on strong foreign portfolio investor buying. The rupee could be a target for traders if it weakens during the swap reversal, or if the Monetary Policy Committee takes unexpected decisions in its next policy meeting in October.

August and September have seen selling by domestic institutional investors but FPIs (foreign portfolio investors) remain strongly positive for September. Retail remains positive. Technically, the Nifty has registered a sequence of 52-week highs. So, we'll assume that the long-term and intermediate perspectives are bullish, until and unless the Nifty breaks down. Every trend following system would suggest staying long, with a trailing stop-loss at around 8,650 or so.

The Nifty Bank remains a high-beta index. It has hit all-time highs this month (at 20,459) and has reacted more. A long Nifty Bank September 29, 19,500p (92), long September 29, 20,300c (119) costs 211 and its almost zero-delta with the index at 19,907. Either end of this long strangle could be struck, given two big sessions in either direction. The trader could sell the September 22, 19,500p (42) and the September 22, 20,300c (50). This short strangle cuts overall costs to only about 120. If it is struck, the long strangle should gain enough to offset short-losses.

The put-call ratios (PCR) are in very positive territory. The Nifty PCR is at around 1.25 for both the one-month and three-month chains. The Nifty call chain now has significant open interest above 9,000 levels at strikes like 9,200c and 9,500c and it has decent OI till 10,000c. The put chain has good open interest down till 7,500p.

The Nifty is at 8,808. A bullspread with long September 8,900 (48), short 9,000c (20) costs 28 and pays a maximum 72. This position is 90 points from money. A bearspread with long September 8,700p (40), short 8,600p (23) costs 17 and pays a maximum 83. This is 110 points from the money. As of now, technical signals suggest that the index is likely to trend up. A combination of these two spreads works out to a combination long-short strangle. This four-option position costs 45 with breakevens at 8,655, 8,945. It has a maximum return of 55 and seems quite attractive.

Another conservative position would be a long call butterfly with long 8,800c (97), two short 8,900c (2x48) and a long 9,000c (20). The total cost is 21 and this would yield a maximum return of 79 at around 8,900.